K-Swiss (KSWS)

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Bulls: Reasons To Buy Feeling Bullish? Be the first to explain why this would make a good investment See all Bears Reasons Bears: Reasons To Sell expecting 08 -ve eps 0% agree expecting 08 -ve eps for the year i expect a -eps. they are basing a revenue of approximately 300m. this in turn leads to a gross profit of approx. 130-140m. they expect sg+a to be 150 which leads to operating income of -10-30m. even if they buy back the 3.9m repurchase of shares the companys' internal estimate of 0.05-0.25 eps for the year seems overly rosy. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Over the past three years, K-Swiss's revenues have fallen from $508.6 million in 2005 to $410.4 million in 2007. This is largely result of slowing growth in the U.S. footwear market (2% growth in 2007 vs 5% growth in 2006) and stiff competition from Nike and Adidas, which held a combined 57% share of the global market for athletic footwear.^[2][3] However, K-Swiss is in the midst of a multi-year turnaround plan that the company hopes will revitalize declining domestic sales while continuing to grow international sales. Among its plans are the development of new products and a bold marketing campaign; in preparation for the costs its plan will entail, K-Swiss has built up cash reserves of more than $290 million and remained debt-free as of 2007.^[4] The success or failure of this turnaround will have a great impact on K-Swiss's future in the maturing domestic footwear market.

[edit] Company Overview

K-Swiss 2007 Annual Report^[5]

K-Swiss manufactures 92% of its footwear in China, 6% in Thailand, and 2% in Taiwan.^[6] It generates revenues by selling this footwear, along with a limited line of apparel and accessories, to different types of retailers. As a result of lagging sales (domestic sales fell 34% in the fourth quarter alone), company revenues and operating income for 2007 were down 18% and 67%, respectively.^[7]

Over the past several years, K-Swiss has become an increasingly international company. In 2007 alone, domestic revenues fell 36%, with international revenues increasing by 14%. ^[8] 50% of 2007 sales came from international markets, compared to 35% in 2006 and 24% in 2005.^[9] The first quarter of 2008 followed this trend, with 60% of sales being international. ^[10]

Like some other footwear companies, K-Swiss works closely with Foot Locker (FL), which accounted for 13% of all K-Swiss sales in 2007. However, the company has been reducing its exposure to the retailer. In 2006 and 2005 respectively, Foot Locker accounted for 15% and 18% of revenues.^[11] While K-Swiss does have other big customers, no one else accounts for more than 10% of revenues.

K-Swiss 2007 Annual Report^[12]

At the end of the 2007 fiscal year, the company had $291.2 million in cash on its balance sheet, compared to $260.2 million in 2006.^[13] In addition, K-Swiss has managed to remain debt free. Since 2003, the only year the company had debt was 2004 ($6.8 million). This was quickly paid off and K-Swiss was debt-free again by the end of 2004.^[14]

[edit] K-Swiss

The K-Swiss brand is the profit driver for this company. It accounts for nearly all of the company's revenue, with $387.42 million in sales in 2007. The brand's signature shoe is the K-Swiss Classic, a casual shoe that has had the same basic design since 1966. The Classic typically represents roughly 70% of brand revenues. The brand also competes in the tennis, training, and children's shoes markets, who have repectively accounted for 7%, 5%, and 18% of revenues for the past three years.^[15]

[edit] Royal Elastics

Royal Elastics is a wholly-owned subsidiary that was acquired by K-Swiss in 2001. This brand specializes in making footwear that has no laces; instead, the shoes have a "slip on" design a stretch to fit one's foot. Royal Elastics forms a relatively small part of K-Swiss's overall business. In 2007, Royal Elastics had revenues of $15.9 million (3.87% of total revenue), up from $11.9 million in 2006 (2.37%).^[16]

[edit] Trends and Forces

[edit] K-Swiss banking on success of turnaround plan

In 2007, K-Swiss saw its stock price fall by almost 50% while in the midst of its turnaround plan.^[17] This drop was mainly due to an overall decline in sales, as well as declining futures orders (orders placed in advance) and backlogs. However, the future is not lost for K-Swiss because it is debt-free and has available cash. Much of this money will go towards marketing endeavors, such as K-Swiss' planned 2008 "Keep It Pure" campaign, and new shoe designs. This will work towards the goal of revitalizing K-Swiss' lagging domestic sales, as well as to bolster its rising international sales. For example, the company is sponsoring the first K-Swiss China Ironman competition. K-Swiss will also be making a move into the running market, which represents roughly 30% of the global footwear market. If any of these marketing and product development ventures fail, the likelihood that K-Swiss's turnaround plan will be successful at stimulating sales will diminish.

[edit] U.S. footwear market maturing

K-Swiss 2007 Annual Report^[18]

While K-Swiss's international sales have grown over the past few years, its domestic sales have declined. From 2005 to 2006, domestic sales fell 16.2%. They fell again from 2006 to 2007 by 36.5%.^[19] This can partly be attributed to the maturity of the U.S. footwear industry. Growth of industry sales between 2007 and 2006 was only 2%, compared to 5% between 2006 and 2005.^[20] At the same time, the top three players in the industry (Nike, adidas, and Puma) hold nearly 65% of U.S. market share.^[21] Given the maturing footwear market in the U.S. and the superior financial strength of some of the company's competitors, rebuilding domestic sales will be a difficult task. If it is not successful, K-Swiss can choose to refocus its efforts on continuing growth of international sales rather than reclaiming lost market share in the U.S. market.

Many footwear companies allow their buyers to place orders in advance, and backlogs are any orders set to ship within 6 months. This system allows investors to take a slight peek into the future in terms of the company's sales. For K-Swiss, backlog at the end of 2007 was $147.8 million, a 12.5% decrease from the $168.9 million backlog at the end of 2006. The reason behind the fall was a 40% decrease in domestic backlog (international backlog increased 14%).^[22] Additionally, the backlog at the end of the first quarter of 2008 was down 46% domestically (down 2.8% internationally), compared to the backlog at the same time in 2007. Note that backlogs are not always indicative of future sales since buyers can cancel orders at any time without financial penalty.

[edit] Certain shareholders have a lot of influence over company decisions

At the end of 2007, K-Swiss' President and CEO Steven Nichols had 70% of all stockholder voting power.^[23] This would allow him to greatly influence any issue that might come to a stockholder vote, such as possible mergers, elections of directors, and corporate decisions.

[edit] Competition and Market Share

For comparison purposes, K-Swiss had 2007 revenues of $410.4 million.

• Nike (NKE): 2007 revenue - $16.3 billion. Nike competes with K-Swiss in the sports footwear and apparel markets. Nike has a sizable advantage when it comes to economies of scale and financial resources.

• Adidas AG (ADDYY): 2007 revenues - $13.7 billion. The adidas Group competes in the overall sporting goods market. It makes sports footwear, apparel, accessories, and equipment. K-Swiss competes with the adidas Group via the group's two brands adidas and Reebok. Like Nike, this company also has big advantages in economics of scale and financial resources compared to K-Swiss.

• Puma AG: 2007 revenue - €1.7 billion ($2.3 billion based on the average 2007 exchange rate). Puma AG is a Germany-based competitor in the sporting goods market, designing and producing sports footwear, apparel, accessories, and equipment. It operates through two brands, Puma and Tretorn.^[24]

• Skechers U.S.A. (SKX): 2007 revenue - $1.4 billion. Skechers designs, markets, and sells contemporary footwear. It does so under a Skechers brand, as well as 8 other unique brands targeted at specific audiences. Skechers sells its products through traditional retail channels; it also owns over 180 retail stores worldwide. ^[25]

The pie chart below shows that K-Swiss has 1.8% market share of the global athletic footwear market. It's share of the global athletic apparel market is not significant.^[26]

Commerzbank Equity Research^[27]

[edit] References

1. ↑ KSWS 2007 10-K, Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations"
2. ↑ US Footwear Sales, 2005-2007 | IT Facts | ZDNet.com
3. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008
4. ↑ The Motley Fool, "K-Swiss Battered But Beautiful"
5. ↑ K-Swiss 2007 Annual Report pg. 20, "Selected Financial Data"
6. ↑ K-Swiss 2007 Annual Report pg. 7, "Business"
7. ↑ K-Swiss Battered but Beautiful - Motley Fool
8. ↑ K-Swiss 2007 Annual Report, "Letter to the Stockholders"
9. ↑ K-Swiss 2007 Annual Report pg. 4, "Business"
10. ↑ The Motley Fool, "Is K-Swiss OK?"
11. ↑ K-Swiss 2007 Annual Report pg. 59, "Notes to Consolidated Financial Statements"
12. ↑ K-Swiss 2007 Annual Report pg. 4, "Business"
13. ↑ K-Swiss 2007 Annual Report pg. 38, "Consolidated Balance Sheet"
14. ↑ K-Swiss 2007 Annual Report pg. 20, "Selected Financial Data"
15. ↑ K-Swiss 2007 Annual Report pg. 4, "Business"
16. ↑ K-Swiss 2007 Annual Report pg. 23, "Selected Financial Data"
17. ↑ The Motley Fool, "K-Swiss Battered But Beautiful"
18. ↑ K-Swiss 2007 Annual Report pg. 25, "Management’s Discussion and Analysis of Financial Condition and Results of Operations"
19. ↑ K-Swiss 2007 Annual Report pg. 28, "Management’s Discussion and Analysis of Financial Condition and Results of Operations"
20. ↑ ZDNet.com, "IT Facts"
21. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008
22. ↑ K-Swiss 2007 Annual Report pg. 9, "Business"
23. ↑ K-Swiss 2007 Annual Report pg. 15, "Risk Factors"
24. ↑ Google Finance, "Puma AG Rudolf Dassler Sport"
25. ↑ Google Finance "Skechers USA, Inc."
26. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008
27. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008